Good day, and thank you for standing by. Welcome to the 2024 Third Quarter StoneX Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Bill Dunaway, CFO. Please go ahead.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our third quarter ended June 30, 2024. After the market closed yesterday, we issued a press release reporting our results for our third fiscal quarter of 2024. This release is available on our website at www.stonex.com as well as a slide presentation, which we will refer to on this call and our discussions of our quarterly and year-to-date results. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you and all participants should note that the following discussion should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. With that, I'll now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone, and thanks for joining the call. Starting on Slide 3 of the earnings deck. The third quarter of fiscal 2024 was a solid result for us with net income of $61.9 million and EPS of $1.88 per diluted share. This represented a 15.7% ROE on stated book and 16.5% ROE on tangible book value despite a 19% increase in book value over the year and a 54% increase in book value over the last 2 years versus the comparative year-ago period, which was a record quarter for us, where we're down 11% in net income and 13% in EPS. On a consecutive quarterly basis, our earnings were up 17% and our diluted EPS was up 15%. We had record operating revenues of $913.7 million, up 18% versus the prior year. Our operating revenues include not only interest earned on our client float but also carried interest that is related to our fixed income trading activities. Net operating revenues, which net off interest expense as well as introducing broker commission and clearing costs, were also a record and up 7% versus a year ago and up 11% versus the immediately prior quarter. Total compensation and other expenses were up 12% for the quarter, with variable compensation up 8%, which is in line with net operating revenue growth. Fixed compensation and related costs were up 22% versus a year ago and were up 6% compared to the immediately prior quarter, due in large part to severance costs relating to an executive officer. For the 9 months to date, we recorded earnings of $184.1 million or $5.64 per share, down slightly versus the comparative period. On a trailing 12-month basis, our operating revenues were $3.3 billion, up 21% versus the prior 12-month period and adjusted net income was…

Thank you, Sean. I'll be starting on Slide #8, which summarizes our consolidated income statement for the third quarter of fiscal '24. Sean covered many of the consolidated highlights related to the operating revenues for the quarter. So I'll just mention one more item and then cover off on some of the consolidated expense fluctuations and then finish with a segment discussion. Operating revenues for the current quarter included an $8.5 million realized gain on the sale of inventories carried at cost, for which losses on related derivative positions were recognized in the immediately preceding quarter as discussed on our last earnings call. Similar in nature, the prior year quarter had a $3.6 million realized gain on physical inventories carried at cost. Moving on to consolidated expenses, transaction-based clearing expenses increased 21% to $81 million in the current period as a result of the increases in listed derivatives and securities volumes as compared to the prior year. Introducing broker commissions were relatively flat with the prior year at $43.1 million in the current period. Interest expense increased $81 million versus the prior year, primarily as a result of the $72.7 million increase in interest expense related to our institutional fixed income business as well as a $5.2 million increase in interest expense related to securities lending activities, both of which were due to the increase in short-term interest rates, and in addition, in the case of the fixed income business, increased volumes. Interest paid on client balances on deposits declined $2.3 million as compared to the prior year due to the decline in average client float. Interest expense on corporate funding increased $9.2 million due to incremental interest on our March 1, 2024 issuance of senior secured notes due 2031, which allowed us to extend our debt maturity profile and…

Thanks, Bill. Moving on to Slide 13, which sets up the high-level strategic objectives that we are focused on. This basic approach and strategy has been unchanged for over 15 years and has served us well. And we have mentioned and discussed it on numerous calls before, but I think it's probably worth repeating again. We remain in a constructive industry environment, which aligns with our strategy, which is summarized on this slide. Following the financial crisis, there was a comprehensive and significant response from the regulators around the world to create a more robust and durable financial market. The key impacts of this were a massive increase in costs due to more complex process and oversight as well as dramatically increased capital requirements. This made it difficult for smaller firms and those with narrow product offerings to generate sufficient revenue to remain viable given the cost and capital requirements. As a result, there has been and continues to be a fairly dramatic consolidation in our industry. This can be evidenced by looking at clearing FCMs and broker dealers, the number of which has massively declined. We have directly participated in this process through some of our acquisitions and have also benefited indirectly as clients have been forced to find new firms for their business. In addition, we have seen a fairly significant withdrawal from our markets by the big banks as capital requirements have forced them to reevaluate this strategy. The large banks in aggregate still account for the majority share of the market, but they are retreating, which creates a significant opportunity for us. Generally speaking, the Basel capital rules are punitive for the trading type operations we have. And if adopted fully, I'm certain the banks withdraw from our market will continue to accelerate as they increasingly…

[Operator Instructions] Our first question comes from the line of Dan Fannon of Jefferies.

I'd like to start just on the short term, just given all that's happened during the last kind of handful of trading days. I would be curious about what you've kind of seen through your platform, both from a volume perspective, which I assume is elevated, but maybe also on the balance side. I'm curious if you would characterize this as good or bad volatility as we kind of get to some of these very quick moves and extremes. And I know volatility has been low as you highlighted, Sean, in your prepared remarks, but just a little more context around more recent would be helpful.

Well, I think as we've always said, moderate volatility and reasonable interest rates are the best environment for us. Very extreme volatility at the time that we saw at the onset of COVID or in the financial crisis or during the Ukraine war, that can be less helpful because clients end up defaulting. There's a lot of market dislocation, which is difficult to handle. We make a lot of money in those environments, but you can end up with bad debts and charge-offs and the like. I would say the recent volatility over the last 5 days, in my opinion, didn't get to the sort of extreme volatility that I've just described. So there's obviously a spike in volatility. I think, obviously, there were some people who were probably caught offsides by it a little bit. But we didn't see major market dislocations. The market was orderly, but volume spiked, spreads spiked. And obviously, that's good for us, right? So the last 5 days were sort of a good trading environment for us. But not extreme. We didn't see any major dislocations. And as far as we are aware, it's no major sort of damage that we've heard about out there. So I would say sort of high volatility, but without any major problems, if that answers your question.

Yes. That's helpful. And I guess in terms of balances and like risk or kind of what's happened, any changes that's worth noting there?

Nothing that we can discern at the moment. Obviously, in that environment, there are lots of margin calls that have to be made. All of that was done in an orderly fashion, didn't sort of see any major problems. What does tend to happen though, if this volatility continues, and I think we were at extreme low volatility. So even though the mix is probably going to come off the sort of 60 spike it hit, I think we may be in for slightly higher volatility and not cut back down to the low. When that tends to happen, you get recalibrated off a new volatility basis, which may require more balances to be put up to sustain the same level of activity. That's certainly what we saw maybe 18 months ago. I mean one of the reasons we had much higher client balances was the exchange requirements were higher because of the COVID and Ukraine war situation, right, had elevated volatility. So we may see a little bit of an uptick in balances just because margins get recalibrated or sort of higher volatility levels.

Got it. Okay. And then just in terms of the quarter itself, obviously, revenue is quite strong. But we're continuing to see the fixed expense base grow. I think there were some things you called out, Bill, in terms of the one-timers around severance. But if I look the 9-month number versus this year versus last year, just on a reported basis, fixed expenses are growing at a pretty healthy rate. So wanted to get a sense of as you think about this transition longer term of more digitization and frankly, trying to get more efficient, where we think we are in that process because understanding variable comp will move with revenues, but I would have thought there'd be a little bit more higher incremental margin on the fixed side in a period like this.

Sure, Dan. So sure. Yes. I mean, so certainly, as I called out on a little bit, I mean, we had fixed compensation nonvariable compensation up about $6 million sequentially. The vast majority of that, as I touched on during my portion was related to some severance and some acceleration. So I think that certainly, we wouldn't expect to have that level on a go-forward basis. We've seen a build-out of occupancy equipment rental. We are trying to take steps to go offshore with some of our development and the digitization. So we have taken some additional space in India, which is flowing through and we'd like to think we'll see the benefits of that going forward. So obviously, I think that we have seen a pretty good growth. We would like to think that certainly, it's a focus for us going forward to try to drive the operating margin that we have and really focus on the growth in the fixed side. Some of them end up being a little bit out of your control, like professional fees, et cetera. But certainly, it is an area of focus for us. So we would expect the growth in it, certainly not to continue to be at the rate it was kind of in the year-over-year that we've seen here, as you noted.

I would say, Dan, there's sort of 2 big buckets of, I guess, some sort of compensation costs or 2 ways to think about it, right? We've got our sort of institutional sort of high-touch business where there's a lot of variable comp. And that business continues to grow, and we continue to recruit teams of people and hire people and expand that business. And that obviously adds to fixed compensation and obviously, variable comp when the revenues grow. So I don't think that's going to stop growing. I mean I think what we've got to make sure is that, that growth is sort of delivering the incremental revenue, we hope it's going to deliver. On the technology side, certainly for the client-facing technology, you sort of have to build it and spend the money in the hope that down the line, you'll see the revenue. And I think we're starting to see that. And again, I think it's the sort of old game retail platform is doing exceptionally well. And that's where we hope to see real margins because there's almost 0 variable comp attaching to that, but there's a high fixed cost element because you've got a lot of developers and so on. And what we're trying to do there is we factor that cost base by pushing as much of that cost to more efficient locations. So we've got, Bill, correct me if I'm wrong, but round numbers, we've got 400-plus people now in India. We've got 300-plus people in Poland. We've got people that we're spinning up in some other lower cost places. And there's a pretty big delta on the cost there. I mean it's 50% or greater in some of those regions. So you get a lot of efficiencies if we can refactor the…

Understood. And then as I think about rates and prospectively, the potential for cuts, can you remind us on the swaps that are rolling off or what else might be offset to lower interest rates on your interest income?

Sure, Dan. The vast majority of all the swaps are rolled off. The one we do still have on is pretty close to current market rates or just maybe 50 bps lower than what we saw. So we do have, in the earnings deck, kind of still that sensitivity table that shows about a $20 million delta for a 100 basis point drop. And either increase or drop or obviously the drop is what everybody focused on now. But what I will say is that does kind of factor in that there is a fair amount that we are paying clients, particularly on the institutional side, where it is just a spread on the business. So there's probably about 1/3 of those balances that with the drop in rates, it's really not going to affect our overall capture on a net basis. And there's another probably 1/3 where it will partially affect it and then a 1/3 that you're not really paying interest on. So overall, it's captured kind of in the net interest rate sensitivity table, but it won't be a dollar-for-dollar drop on the downside. So it will be some muted by the fact that we are just earning a spread on some of it. Does that make sense?

Yes. No, it does. I guess then just following up, Sean, just on kind of the environment. This location like this, does this create more inorganic opportunities? It's been for you guys a little bit quiet for several quarters, but the organic growth has been positive. So curious about just the dialogue and opportunity set as you think about M&A in this environment?

Yes. We're just dealing with the organic opportunity. I mean I think we've seen some really good organic growth at the moment. And it feels to us that the banks are really struggling and sort of having to refocus their business. I mean, we're hearing it from a number of banks now. So we're seeing a lot of talent becoming available and a lot of clients sort of being shaken loose. So the organic sort of opportunity for us is pretty significant. And as I think I've discussed before, if we can bring on teams of people, that's almost like an acquisition, right? It's not recorded or accounted for as an acquisition, but the net result is the same. You end up with a big chunk of incremental revenue coming across, if you do that right. So that's very constructive at the moment. In terms of acquisitions, I think as I said previously, we're definitely seeing more come across our desks, and we're looking at a bunch of stuff. There's nothing we can mention at this point that's significant. But certainly, it seems like the environment is getting better. If you have extreme dislocation, that generally provides a lot more opportunity for us. I don't think what we saw in the last 5 days is extreme. I think I said that earlier. I mean, it was sort of a blip and it was good to see volatility going up a little bit. I don't think that's going to create any discrete opportunities of itself. But it does feel like the private equity bid is sort of a little bit going away. Higher interest rates have made that harder. It does look like a lot of these sort of start-ups that were spun up on unrealistic sort of expectations during the COVID period when money was sort of free and available to all those businesses are sort of 4, 5 years in now and a lot of them are struggling. So from that sense, it's becoming quite interesting. I think there are going to be a lot of interesting opportunities coming out of that. Now a lot of those businesses may just not be viable at all and not interesting to us. But I do think there's sort of a lot of stuff where the chickens are coming home to roost, and that does give us some opportunities. So we'll see how it goes.

I'm showing no further questions at this time. I would now like to turn it back to Sean O'Connor for closing remarks.

Well, thanks, everyone, for taking the time to listen. We appreciate it. And for everyone here in the Northern Hemisphere anyway, enjoy the rest of the summer, and we'll speak to you in 3 months' time. Thanks so much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.